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IRA ROLLOVER GUIDE Distribution Options • Tax Rules • Retirement Income Strategies • Estate Planning

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Executive Summary .................................................................................................................................. 3

The Changing World of Work .............................................................................................................................. 3

Exploring Options ................................................................................................................................................ 3

The IRA Rollover Guide ...................................................................................................................................... 3

Exploring Options ..................................................................................................................................... 4

When can money be paid out of a retirement plan? ........................................................................................... 4

What options are available when a worker leaves an employer? ....................................................................... 5

What variables should be considered by the participant

when deciding what to do with employer plan assets? ....................................................................................... 6

Evaluating Options ................................................................................................................................... 6

Leave Funds in Previous Employer’s Plan ......................................................................................................... 6

Roll Over Funds to New Employer’s Plan ........................................................................................................... 7

Roll Over Funds to an IRA .................................................................................................................................. 7

Special Considerations for Rollovers from Defined Benefit Plans ...................................................................... 9

Mastering the Mechanics of an IRA Rollover ...................................................................................... 10

Eligible Plans and Eligible Assets ..................................................................................................................... 10

IRA Rollover Process ........................................................................................................................................ 11

Roles and Responsibilities ................................................................................................................................ 11

Rollover Taxation Rules .................................................................................................................................... 13

Understanding the Role of the IRA in Retirement Income Strategies

and Estate Planning ............................................................................................................................... 14

Access to IRA Assets ........................................................................................................................................ 14

Avoiding the 10% Early Distribution Tax ........................................................................................................... 14

RMD Rules ........................................................................................................................................................ 15

Inheriting IRA Assets ......................................................................................................................................... 15

Stretch IRA ........................................................................................................................................................ 17

Trusts and Estates as IRA Beneficiaries ........................................................................................................... 17

Trusteed IRAs ................................................................................................................................................... 17

Summary .................................................................................................................................................. 18

Appendix A – Glossary of Terms .......................................................................................................... 19

Appendix B – Links to Additional Rollover Resources ...................................................................... 20

IRS Resources .................................................................................................................................................. 20

Department of Labor Resources ....................................................................................................................... 20

LPL Resources .................................................................................................................................................. 20

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Executive Summary

The Changing World of Work

Most workers in the United States count on employers to help them save for a financially secure retirement.

Employer-sponsored retirement plans such as 401(k) plans and profit sharing plans hold more than $32 trillion in

retirement savings.1

One of the most important financial decisions workers will make is what to do with assets they have accumulated

in their employer’s retirement plan when they leave their job. Traditionally, this decision needed to be made when

workers retired, but it’s not just a retirement issue anymore.

Today, most workers will change jobs several times during their working years. Unlike past generations who may

have spent most of their career with a single employer, the median tenure for a worker today is only 4.2 years.2

Each worker who decides to go to work for a new employer may be faced with the decision of what to do with the

retirement plan assets in the prior employer’s plan. The choices workers make each time they change jobs will

have a significant impact on their retirement nest eggs.

In addition to job changers, more than 70 million baby boomers will reach retirement age and will likely leave the

work force over the next 20 years.3 Each of these baby boomers will need to decide what to do with the funds

they have saved through their employers’ retirement plans.

Exploring Options

Most workers will have four options for their retirement plan assets when they leave an employer:

Leave the assets in the prior employer’s plan

Roll the assets to a new employer’s plan (if continuing to work and plan is available)

Roll the assets to an IRA

Cash out the retirement savings

Determining which option is best can be challenging for individuals. There is no “one size fits all” solution. The

best choice will vary depending upon an individual’s unique financial needs and savings objectives.

Many workers have chosen to roll their savings from their prior employer’s plan into an IRA. IRAs currently hold

$11 trillion, representing a substantial portion of overall retirement savings in the U.S.1 Rollovers from employer

plans are the most significant source of dollars flowing into IRAs.3 But, an IRA rollover is not the only option and it

may not be the best choice for a particular individual. Regulatory agencies, including the Financial Industry

Regulatory Authority (FINRA), the regulatory agency that oversees broker dealers, have emphasized how

important it is for workers to understand all of their options and evaluate multiple variables when deciding whether

to roll assets to an IRA.4

The IRA Rollover Guide

The objective of the IRA Rollover Guide is to provide foundational education regarding how and when assets can be

rolled between retirement arrangements. The Guide will highlight some of the variables that should be considered

when evaluating the four distribution options and will describe the tax rules that apply to rollover transactions. The

Guide also contains a Glossary of Terms (Appendix A) defining many of the common technical terms individuals

may encounter as they explore IRA rollover options.

As with any important financial decision, an individual is often well served by seeking professional assistance.

Financial Professionals with investment expertise, as well as tax and legal advisers, can provide valuable support to

individuals who want to learn more about IRA rollovers.

.

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Exploring Options

When can money be paid out of a retirement plan?

Retirement plans offered by employers, such as 401(k), 403(b), profit sharing, and defined benefit plans, are

designed to help workers save for retirement, not to help them manage their short-term spending needs. To

discourage retirement plan savings from being depleted early, there are a number of tax rules that restrict access

to retirement savings prior to retirement years. One of these rules allows distributions from an employer plan only

after certain events occur. These are sometimes referred to as “distribution triggering events.” Two common

triggering events are severance from employment and plan termination. Special triggering event rules apply to

certain types of contributions. For example, an employee’s deferrals into a 401(k) plan can only be disbursed if

the individual has reached age 59½; or has died, separated from service, retired, or become disabled (as defined

in the plan document and the IRS); or the plan has terminated.

A rollover from an employer plan to an IRA generally cannot occur unless there has been a triggering event. Most

IRA rollovers are triggered by workers leaving their employers. However, some plans are designed to permit

rollovers of certain types of assets while an individual is still employed (e.g., assets originating from a prior

employer’s plan). These types of distributions are referred to as “in-service” distributions.

One way to identify triggering events that apply to a specific plan is to review the plan’s Summary Plan

Description (SPD). This document describes the plan’s features, including distribution options, and must be

provided to each worker who participates in the plan. Other sources for this information include the plan’s

administrator or participant support services available online or through a call center.

Automatic Rollovers – Some rollovers occur automatically, even though an individual has not requested a

payout from the employer plan. Many plans are designed to automatically pay out assets when a worker

terminates employment if the individual has a plan balance less than $5,000 and has not directed the plan

administrator to either make a distribution or roll it to another plan. These payouts are sometimes referred

to as “automatic rollovers” or “force-outs.”

If the balance is $1,000 or less, it may be simply cashed out and sent to the individual without the

individual’s authorization.

If the vested plan balance is between $1,000 and $5,000, the amount automatically disbursed from

the plan must be rolled over to an IRA that is set up on behalf of the former employee.

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What options are available when a worker leaves an employer?

Once individuals are eligible to take a distribution in a defined contribution plan, they typically have four options.5

Leave funds in previous employer’s plan

Roll over funds to new employer’s plan

Roll over funds to an IRA

Cash out

Before Separation A worker invests part of his income in an employer- sponsored 401(k) plan and he may receive education or guidance on investing from the employer (plan sponsor) who is responsible for monitoring the investment options

After Separation When the worker leaves his job, he might receive information about the from 401(k) plan savings from the employer or a plan service provider

The worker has four basic options for dealing with the 401(k) savings from his previous job…

When a worker is eligible to take a distribution that may be rolled over, the plan administrator must provide a

written explanation of the rules and tax consequences pertaining to the worker’s distribution and rollover options.

These notices are sometimes referred to as “402(f) notices,” based on the section of the Internal Revenue Code

that contains the requirements for this notice. These notices can be difficult to understand if written in complex

language, but are one resource for exploring the worker’s distribution options. A copy of the distribution notice

may be requested from the plan’s administrator.

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What variables should be considered by the participant when deciding what to do with employer

plan assets?

Evaluating Options

Leave Funds in Previous Employer’s Plan

Potential Benefits

Investment options Investment options are prudently selected and monitored by a fiduciary

Fees and fee

disclosures Investment fees may be lower when offered through retirement plans as

compared with individual retail accounts

Fee disclosures must be provided to help individuals compare costs among plan

investment options and to alert individuals to fees charged to their account

Some administrative costs may be paid by the employer

Plan administration

and other services Employer is responsible for administering the plan in compliance with various

laws and regulations

Plan may offer services such as access to investment advice, education, call

center support

Distributions and loans Many plans allow loans, permitting access to plan assets with the ability to restore

retirement savings

Separation from service after age 55 is an exemption from the 10% early

distribution tax (for distributions taken prior to age 59½) that is available for

qualified plan distributions but not IRA distributions

Creditor protection Plan assets are generally not subject to creditor claims

Other considerations Pre-tax assets and tax-deferred earnings are not included in income until

distributed from the plan

Considerations

Investments The menu of investments is determined by the plan fiduciary and may be

narrower than in an IRA

Plan administration

and other services Employer has the option to charge former employees’ accounts for certain

administrative fees that are not being assessed against current employees

Distributions and loans Plan may allow someone who is still employed to delay age 72 required minimum

distributions (RMDs)

Some plans require loan repayments to be made through wage withholding,

limiting loan access for former employees

Plan may limit the types of distributions allowed, making it less feasible to take a

stream of retirement income payments (commonly called “installment payments”)

or to implement estate planning strategies

Depending on the plan, investments designed to provide long-term retirement

income (e.g., annuities) may not be available

20% mandatory withholding

Other considerations If an individual has worked for several employers during their career, they may

have assets in several different plans

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Roll Over Funds to New Employer’s Plan

Potential Benefits Same potential benefits as leaving assets in previous employer’s plan

Ability to consolidate assets to simplify investment decisions and overall

management of retirement savings

Considerations Need to compare investment options, plan features, and services in new

employer’s plan versus previous employer’s plan

Roll Over Funds to an IRA

Potential Benefits

Investments May have access to a broader range of investments than in an employer plan

IRA owner can change investments at any time (subject to IRA provider

requirements)

Fees and fee

disclosures IRA provider is required to provide a disclosure statement explaining the features

of the IRA, serving a purpose similar to the Summary Plan Description provided

for employer plans

Plan administration

and other services IRA trustee or custodian handles contribution and distribution reporting and will

assist with age 72 RMD calculations

Distributions and loans Distributions are available at any time

Additional exemptions from the 10% early distribution tax (for distributions taken

prior to age 59½) apply to IRA distributions (e.g., certain higher education

expenses, first-home purchases)

In certain circumstances federal income tax is withheld at 10% if no election is

made at the time of an IRA distribution.

You may elect to have no tax or a different amount withheld

Roth IRAs are not subject to the age 72 RMD rules

Flexibility regarding distribution timing and amount can support retirement income

and estate planning objectives

Creditor protection Creditor protection is available in some states (but not to extent applicable to

employer plans)6

Other considerations IRA owners may make annual contributions to IRAs, even after age 72, provided

they have earned income

IRAs may be used to consolidate assets from multiple employer plans

IRAs may offer more flexible beneficiary options.

Considerations

Investments IRA owner is generally responsible for selecting and monitoring investments

unless the IRA owner engages a financial professional to provide discretionary

investment services

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Fees and fee

disclosures Investment fees may be higher when offered through an IRA as compared to an

employer-sponsored retirement plan

The expansive fee disclosures provided to employer plan participants are not

typically provided for IRAs

Plan administration

and other services IRA owner is responsible for administering the IRA, with support from the IRA

trustee or custodian

Services may be more limited than offered in the employer plan (e.g., education,

investment advice, support line)

Distribution and loans No plan loans permitted for IRAs

A 10% early distribution tax applies to taxable distributions taken prior to age

59½, unless an exception applies

In certain circumstances federal income tax is withheld at 10% if no election is

made at the time of an IRA distribution.

You may elect to have no tax or a different amount withheld,

Creditor protection IRAs are protected under federal bankruptcy law.

(Protection amounts may vary depending on state law. For more information, see

http://moranknobel.com/news/State_Laws_Protecting_IRAs.pdf.

IRAs are not afforded the broad federal protection from other types of creditor

claims available for employer plans; however, state law may provide certain

protections.6

Other considerations RMDs must begin at age 72 for Traditional IRAs

Inherited IRAs received January 1, 2020 or later must be fully distributed within

ten (10) years for certain beneficiaries.

There are exceptions to the 10-year distribution rule for spouses, minor children,

beneficiaries less than 10 years younger than the decedent, and disabled

individuals.

Employer stock rolled from an employer plan to an IRA will be taxed as ordinary

income when distributed, whereas stock held in other types of accounts may

qualify for capital gains treatment.

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Special Considerations for Rollovers from Defined Benefit Plans

The distribution options available in defined benefit plans are different than those commonly available in

defined contribution plans. Defined benefit plans offer payments in the form of a life annuity that is

guaranteed for life. Unlike defined contributions plans, which base the distribution amount on the amount

contributed to the plan (plus earnings), a defined benefit plan calculates the amount of the payments based

on a formula that takes into account certain factors such as the employee’s years of service with the

employer, compensation, and age at retirement. These payments are not eligible to be rolled over to an

IRA or another employer’s plan. Some defined benefit plans also allow individuals to take a lump sum

amount. This lump sum may be eligible to be rolled over to an IRA or another eligible plan. While the

impact of rolling a lump sum to an IRA or a new employer’s defined contribution plan would be the same as

outlined in the previous charts, leaving assets in the former employer’s defined benefit plan and taking

distributions from the plan have some unique characteristics that should be taken into consideration.

Funding and Investments

Plan sponsor is responsible for making contributions to fund the projected payments, based on

actuarial calculations

Plan sponsor selects and monitors investments and bears the investment risk

Distributions

In-service distributions not permitted prior to age 62

Predictable payment amounts (e.g., monthly) based on plan’s benefit formula, not tied to investment

performance

Payments guaranteed for participant’s life (or joint life of participant and spouse)

Pension Benefit Guarantee Corporation (PBGC) guarantees payment up to a certain level if

employer is unable to make payments

Payments are usually locked in once they begin and cannot be changed

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Mastering the Mechanics of an IRA Rollover

The previous sections addressed when assets could be rolled over and what factors individuals may want to

consider when evaluating whether an IRA rollover is appropriate for their retirement plan assets. In this section,

we will address the mechanics of a rollover and introduce the players that are typically involved in a rollover.

Eligible Plans and Eligible Assets

If an individual decides a rollover is the best option, they need to select an eligible retirement arrangement to

receive the rollover. As discussed earlier in the Guide, an IRA is not the only option. In an effort to preserve

retirement plan assets for retirement, the laws and regulations allow for fairly free movement of assets among

different types of retirement plans. The following chart, created by the IRS, lists the types of plans and IRAs that

can accept rollovers.

1 Qualified plans include, for example, profit sharing, 401(k), money purchase, and defined benefit plans 2 Only one rollover in any 12-month period 3 Must include in income 4 Must have separate accounts 5 Must be an in-plan rollover 6 Any non-taxable amounts distributed must be rolled over by direct trustee-to-trustee transfer 7 Applies to rollover contributions after December 18, 2015

For more information regarding retirement plans and rollovers, visit Tax Information for Retirement Plans

(https://www.irs.gov/retirement-plans)

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The assets in an eligible employer retirement plan are generally eligible to be rolled over to another eligible plan

or IRA. Certain types of distributions, however, are not eligible to be rolled over, even if there is a distribution

event.

Age 72 required minimum distributions (RMDs)

Hardship distributions

A series of substantially equal periodic payments

Corrective distributions (e.g., excesses distributed from a 401(k) plan)

Dividends on employer securities that are distributed from a plan

Certain costs for life insurance coverage (PS58 costs)

IRA Rollover Process

Although there may be some variations based on the service providers, most IRA rollovers will include the

following steps.

Roles and Responsibilities

An IRA rollover will usually involve a number of different players.

Role Responsibilities

IRA Owner One of the prime characteristics of an IRA is that the IRA owner has control over the

account, independent of an employer.

Decide what type of IRA to establish – ex. traditional or Roth

Select an IRA provider who will administer the IRA

Execute the IRA plan agreement and other required documentation to set up the

IRA, review disclosures, and designate beneficiaries

Decide how much to roll over and whether to make annual contributions in future

years

Select investments from among those available through the IRA provider

Track taxation, including any nondeductible contributions made to traditional IRAs

(IRS Form 8606, Nondeductible IRAs)

Track timing rules such as the 5-year rule in connection with Roth contributions

Report distribution from the plan and contribution to the IRA, and any future IRA

contributions and distributions to the IRS on annual tax return (IRS Form 1040,

U.S. Individual Income Tax Return)

Decide when and how much to distribute from IRA

1. Leave employer (or meet another distribution event)

2. Select an IRA provider and type of IRA

3. Sign documents to set up the IRA

4. Initiate the rollover with the employer

5. Select investments for the IRA

6 . Report movement to the IRS

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Financial Professional Financial professionals provide investment expertise and help individuals evaluate

the benefits of IRAs versus other savings options.

Introduce possible IRA product and service providers and help evaluate the

various options

Serve as intermediary between IRA trustee or custodian and individual, if

appropriate, to deliver IRA set-up documentation

Provide investment expertise to educate IRA owners about the various

investment options

Provide ongoing investment support to help the IRA owner monitor and adjust

investments

Trustee or Custodian IRA assets typically must be held in a trust or in a custodial account for the benefit

of the IRA owner (unless the assets consist only of insurance contracts). Most

financial organizations that offer IRA products and services can hold the IRA assets,

serving as trustee or custodian and provide the following services.

Provide plan documents and disclosures needed to open an IRA

Provide documentation to initiate the rollover from the prior employer’s plan

Administer the rollover

Draft and deliver amendments when the laws and regulations affecting IRAs

change

Prepare and deliver annual notices to IRA owners

Report information required by the IRS regarding IRA activity such as

contributions and distributions on IRS Form 5498, IRA Contribution Information,

and Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-

Sharing Plans, IRAs, Insurance Contracts, etc.

Administer contributions and distributions requested by the IRA owner, including

collecting and remitting taxes

Calculate age 72 RMDs

Provide regulatory compliance guidance, be available to provide answers to

questions regarding the IRA rules

Other Service

Providers

Because IRAs are often an element of an individual’s estate plan or tax

diversification strategy, IRA decisions may involve legal or tax professionals.

An attorney may be retained to discuss various strategies for transferring

property and to draft legal documents, such as wills and trusts, that may be

required to execute the individual’s strategy

An accountant may be needed to assess options for minimizing the tax

implications of various savings and retirement income strategies or when

transferring property

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Rollover Taxation Rules

The taxation of a rollover will be dictated by the types of plans and the types of assets involved in the rollover.

Tax-free rollover from employer plan to IRA or another employer plan – A rollover from an employer-

sponsored retirement plan to a traditional IRA or to another employer plan is generally a tax-free movement of

assets. Individuals can choose to roll over assets directly to the receiving IRA or employer plan. In a “direct

rollover,” the check or wire is issued to the custodian or trustee of the IRA or other plan to be held for the benefit

of the individual. Individuals can also choose to take a distribution from the plan and complete an “indirect

rollover” or “60-day rollover” to an IRA or employer plan by re-depositing the assets within 60 days following the

date of distribution.

There is no income tax withholding on a direct rollover – the assets are moved directly from the plan to the

receiving IRA or plan. If the transaction is an indirect rollover (i.e., paid to the individual first), the employer must

withhold 20% of the taxable distribution amount. To complete a tax-free 60-day rollover, an individual must make

up the 20% withheld when making the rollover into the IRA or plan. If the 20% is not made up, it will be taxable to

the individual in the year of distribution and may be subject to the 10% early distribution tax. (Individuals may

recover some or all of the 20% withheld when they file their tax return for the year.)

Tax-free rollovers and transfers among IRAs – IRA owners can freely move assets directly between IRA

trustees or custodians, referred to as a “transfer.” IRA owners can also move assets in the form of an indirect

rollover. Individuals may conduct only one indirect rollover during any 12-month period, even if they have multiple

IRAs.7 This 2-month restriction does not apply to IRA transfers or to rollovers from employer retirement plans.

Taxable conversion from traditional IRA to Roth IRA – Similar to the taxable rollover option between an

employer plan and a Roth IRA, traditional IRA assets may be moved to a Roth IRA in a taxable transaction

referred to as a conversion. This option enables an IRA owner to decide when to pay taxes on certain assets.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to

executing a conversion from a Traditional IRA to a Roth IRA. Effective January 1, 2018, pursuant to the Tax Cuts

and Jobs Act (P. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be

recharacterized.8

Taxable rollover/conversion from employer plan to Roth IRA – An individual can make a taxable rollover, also

known as a conversion, from an employer plan to a Roth IRA. This transaction is taxable because assets in the

plan that have not yet been taxed (e.g., employee deferrals, employer matching and profit sharing contributions)

are moved into an account that only accepts after-tax assets (a Roth IRA). The amount being rolled is taxed in the

year it is distributed from the plan. When the assets are ultimately distributed from the Roth IRA, the rollover

amount can be taken out tax free. Any additional earnings in the Roth IRA will also be tax free if the distribution is

considered a “qualified distribution.” The new Tax Cuts and Jobs Act mentioned previously (effective January 1,

2018), also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as

401(k) or 403(b) plans.8

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Understanding the Role of the IRA in Retirement Income Strategies and Estate Planning

Access to IRA Assets

One of the benefits often cited for an IRA is the flexibility of being able to take an IRA distribution at any time.

However, because IRAs were designed to help individuals save for retirement, Congress created rules to discourage

individuals from withdrawing funds from their IRAs prior to their “retirement” years. The distribution timing rules can

have a big impact on how IRAs will be used to fund retirement or other wealth management strategies.

Before age 59½ – An additional 10% early distribution tax applies to the taxable portion of any distribution

taken prior to age 59½. There are some exceptions to the early distribution tax as highlighted below.

After age 59½ – Once an individual reaches age 59½, the option to take a distribution at any time

continues and the 10% early distribution tax no longer applies.

Age 72 – The year an individual attains age 72 and every year thereafter, required minimum distributions

(RMDs) must be taken from traditional IRAs.

Avoiding the 10% Early Distribution Tax

An IRA distribution taken prior to age 59½, like a qualified plan distribution, is generally subject to a 10% early

distribution tax on the taxable portion of any distribution. This tax is in addition to income tax that may be

owed on the distribution. Individuals may avoid the 10% early distribution tax if they qualify for one of the

exceptions to the tax listed below.9 The exceptions noted with an asterisk (*) are available for IRA distributions

but not qualified plan distributions. The ability to access retirement assets free from the additional 10% tax is

one of the variables that may influence the IRA rollover decision for certain individuals.

Amount of unreimbursed medical expenses (>7.5% AGI; after 2012, 10% if under age 65)9

Health insurance premiums following unemployment *

Disability

Death

Attainment of age 59½

Qualified higher education expenses *

First-time home purchase (up to $10,000)*

IRS levy (used to satisfy a tax debt)

Distributions by a qualified Reservist

Substantially equal periodic payments

One of the most common techniques used to access IRA assets before age 59½ is to take “substantially

equal periodic payments.” This option can be used at any age. Under this exception to the 10% tax, IRA

owners set up a schedule of “substantially equal” payments. The payments must be made at least annually

and must be made for a certain period of time. The amount of each year’s payment is typically calculated

using one of three methods outlined in IRS guidance: the required minimum distribution method, the

annuitization method, or the amortization method.

The IRA owner must receive a payment at least annually until he or she reaches age 59½ or for 5 years,

whichever period is longer. If the series of substantially equal periodic payments stops or is modified before

the end of the minimum payment period, the protection from the10% tax is lost and the IRA owner will be

required to pay the 10% early distribution tax retroactively for the distributions that occurred each year the

arrangement was in place, plus interest.

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RMD Rules

Required minimum distributions (RMDs) are an important consideration in any retirement income strategy and

may play a role in estate planning. Traditional IRAs must begin disbursing a portion of the IRA each year once an

individual reaches age 72. The Secure Act of 2019 increased the RMD age from 70½ to age 72 for those who

turn 70½ in 2020. The IRA owner may delay taking the RMD until April 1 of the following year. It is important to

note that when you delay taking your first RMD until April of the following year, you will take two RMDS in the

following year. Each year’s RMD is calculated by taking the IRA’s prior-year December 31 balance and dividing it

by a life expectancy factor, typically based on the age of the IRA owner. The RMD rules determine the minimum

payment an IRA owner must take from an IRA each year. Most IRAs will allow the IRA owner to take larger

payments than required under the RMD rules.

If an IRA owner fails to take an RMD for a year, a 50% excess accumulation tax applies to the portion of the RMD

amount that should have been distributed but remained in the IRA. Although IRA owners are ultimately

responsible for calculating and distributing their RMDs, many IRA trustees and custodians automatically calculate

the RMD amount for the IRA owner. Those who do not routinely notify IRA owners of the RMD amount must

calculate the RMD for the IRA owner upon request.

People who may find a rollover or conversion to a Roth IRA appealing include individuals who:

Want to pay the tax at today’s tax rates on an investment they believe will significantly appreciate in value

Are younger individuals, who may be in a lower tax bracket today, or who have many years to accumulate

tax-free earnings

Are interested in diversifying the tax nature of their retirement savings or those who expect tax rates to be

higher in the future

Are highly compensated employees who have not been able to contribute to a Roth IRA because of the

earned income restrictions but can create tax diversification by contributing to a Roth inside an employer-

sponsored retirement plan such as a 401(k) plan and rolling assets tax-free to a Roth IRA, or initiating a

taxable rollover of pre- tax assets to a Roth IRA

Want to avoid required minimum distributions in order to preserve assets and accumulate earnings as long

as possible

Want to pay the taxes on the assets during their lifetime and provide tax-free assets to heirs

Inheriting IRA Assets

Subject to the SECURE ACT of 2019, when an IRA owner dies, the individual beneficiary named by the IRA

owner will be required to draw down his or her entire inherited balance within 10 years. This rule applies

regardless of whether RMDs had begun prior to the IRA owner’s death.

The 10-year rule does not apply to any portion payable to an “eligible designated beneficiary”. An eligible

designated beneficiary is any beneficiary who is:

The surviving spouse

A minor child

Disabled or chronically ill individual, or

Any person who is less than 10 years younger than the original IRA owner

A spouse beneficiary is not required to take distribution earlier than the date on which the original IRA owner

would have attained age 72. In addition, the surviving spouse has the option of converting the inherited IRA to his

or her own.

In the case of a minor child, the 10-year rule does not apply until the date the child reaches the age of majority.

The 10-year rule will also apply upon the subsequent death of any eligible designated beneficiary

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Finally, for non-individual beneficiaries such as estates, non-qualified trusts, or charities, the inherited interest

must be distributed within 5 years, if the participant dies before the required beginning date, or, by the remaining

single life expectancy of the deceased participant if they died after their required beginning date.

If the trustee or custodian permits, a beneficiary may move inherited IRA assets into a separate inherited IRA.

This is a new IRA established with inherited IRA documents and funded with a transfer of inherited assets after

the death of the IRA owner. Individuals who inherit assets from employer plans may also be able to directly roll

assets into an inherited IRA.

Traditional IRA assets will be included in the beneficiary’s taxable income in the year the distribution is received

(excluding any basis created by nondeductible contributions). The taxation of Roth IRA distributions will vary

depending upon whether the distribution is “qualified” (i.e., the Roth IRA satisfied the 5-year aging requirement).

Qualified distributions will be tax free to beneficiaries. If a distribution is not qualified, the earnings portion of the

distribution will be taxable to the beneficiary, but the amount representing the original Roth contributions will be

tax free.

For additional information, please refer to the SECURE Act provisions available at www.irs.gov or consult your tax

professional.

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Stretch IRA

Previously, inherited IRAs could be distributed over the course of the beneficiary’s lifetime that could result in

significantly reducing the tax consequences of such distributions. Referred to as a “Stretch IRA”, this

distribution strategy allowed the IRA owner to take the minimum payment required and leave as much of the

IRA balance as possible invested to grow tax deferred for as long as possible. With careful beneficiary

planning, the IRA distributions could be stretched over a significant number of years across multiple

generations. However, the Secure Act of 2019 has eliminated this strategy for non-spouse beneficiaries.

Trusts and Estates as IRA Beneficiaries

IRA owners have the option to name a trust or charity, or an estate, as the IRA beneficiary. Naming a trust

as beneficiary enables the IRA owner to dictate to some extent how the IRA assets will be disbursed after

their death. These arrangements are sometimes referred to as “trusteed IRAs.” Trusts are also used in some

estate planning strategies to minimize the impact of estate taxes. Some IRA owners choose to name their

estate as their beneficiary. The assets would then be handled according to the terms of the IRA owner’s will.

If an estate or trust or other entity that is not a person, such as a charity, becomes an IRA beneficiary, it has

more limited payment options than a person would have. In addition to taking a lump sum payment, if death

occurred before the IRA owner was required to begin RMDs, a beneficiary who is not a person generally

must take distributions under the 5-year rule. If death occurred after RMDs were required to begin, a

beneficiary who is not a person may take life expectancy payments based on the decedent’s remaining life

expectancy. There are exceptions for certain types of qualified trusts, which have an option to take life

expectancy payments if the IRA holder died before January 1, 2020, or take advantage of the 10-year rule, if

the IRA holder dies after December 31, 2019.

The tax rules and legal implications of naming estates and trusts as beneficiaries can be complex. Tax or

legal professionals will often be needed to create the necessary legal documentation to implement an

individual’s particular strategy.

Trusteed IRAs

A Trusteed IRA, also known as an Individual Retirement Trust (IRT), is a trust account that integrates IRA

retirement savings goals with estate planning objectives. For tax purposes, a Trusteed IRA is treated the

same as any other IRA. The difference between an IRT and a custodial IRA stems from how the IRA assets

are handled when an IRA owner dies. With a typical custodial IRA, an IRA owner’s beneficiary takes full

control of the inherited IRA assets upon the death of the IRA owner. The beneficiary determines when and

how much will be distributed from the IRA, so long as the beneficiary takes at least the minimum annual

payment dictated by the Internal Revenue Code.

In a Trusteed IRA, the IRA assets will be disbursed by the trustee according to a schedule or a set of

conditions defined by the IRA owner prior to their death. The IRA owner and his or her attorney will usually

work with the IRA trustee to draft a beneficiary designation and trust agreement that will dictate how the IRA

assets will be distributed, subject to the minimum payment requirements under the Internal Revenue Code.

There are a variety of scenarios in which this level of control over IRA distributions may be appealing to an

IRA owner. Some examples include IRA owners who want to

Create a plan to handle the financial needs of minor children or a dependent with special needs

Set certain conditions on the receipt of IRA assets (e.g., attaining a certain age, completing college)

subject to IRS distribution requirements

Provide financial support to a surviving spouse while ensuring the remaining assets pass to the

children of a prior marriage

IRA owners should carefully weigh the benefits along with the costs of a Trusteed IRA. Trust documents and

customized beneficiary designations will need to be created, usually by tax and legal professionals. There

will also be trustee fees associated with administering the IRA.

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Summary

Deciding what to do with assets saved in an employer-sponsored retirement plan is one of the most important

financial decisions a worker will make. For more information about distribution options, including IRA rollovers,

check out some of the Internal Revenue Service and Department of Labor resources listed in the Appendix B –

Links to Additional Rollover Resources. Refer to the Glossary of Terms (Appendix A) for definitions of common

technical terms that may appear in marketing and educational materials relating to IRA rollovers.

As with any important financial decision, an individual should consider seeking professional assistance. Financial

professionals with investment expertise, as well as tax and legal advisers, can provide valuable support to

individuals who want to learn more about IRA rollovers.

Footnotes

1 “The US Retirement Market, Fourth Quarter 2019.” Investment Company Institute 19 Mar. 2020,

https://www.ici.org/research/stats/retirement

2 “Employee Tenure Summary.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, 22 Sept. 2016,

www.bls.gov/news.release/tenure.nr0.htm.

3 US Census Bureau, Merarys Ríos. “Nation's Older Population to Nearly Double.” The United States Census Bureau, 6 May 2014,

www.census.gov/newsroom/press-releases/2014/cb14-84.html.

4 Financial Industry Regulatory Authority (FINRA), Regulatory Notice 13-45, December 2013, www.finra.org

5 U.S. Government Accountability Office (GAO), 401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants,

GAO-13-30, www.gao.gov

6 Moran Knobel, State Laws Protecting IRAs, http://moranknobel.com/news/State_Laws_Protecting_IRAs.pdf

7 IRA One Rollover Per Year Rule | Internal Revenue Service, 27 Nov. 2017, www.irs.gov/retirement-plans/ira-one-rollover-per-year-

rule.

8 “IRA FAQS - Recharacterization of IRA Contributions.” Internal Revenue Service, 23 Jan. 2018, www.irs.gov/retirement-plans/ira-

faqsrecharacterization-of-ira-contributions.

9 “Retirement Topics - Exceptions to Tax on Early Distributions.” Retirement Topics Tax on Early Distributions | Internal Revenue

Service, 29 Dec. 2017, www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions.

Member FINRA/SIPC - 19 -

Appendix A – Glossary of Terms

Beneficiary – A person or entity chosen by the IRA

owner or retirement plan participant to inherit the

assets after the individual dies

Conversion – A taxable movement of assets from a

pre-tax account (e.g., traditional IRA or 401(k) plan) to

a Roth IRA, which is an after-tax account

Early Distribution – An additional 10% tax that

applies to the taxable portion of any distribution taken

prior to age 59½; some exceptions apply

Excess Accumulation – An account owner or

beneficiary who fails to take a required distribution for

a year is subject to a 50% tax on the portion of the

amount that should have been distributed but was not

Excess Contribution – An amount that exceeds the

annual contribution limit for the year or another

contribution limit imposed on an IRA or employer-

sponsored retirement plan

Fiduciary – An individual or entity who manages an

employee benefit plan and its assets must, under the

Employee Retirement Income Security Act of 1974

(ERISA), follow strict standards of conduct, act in the

sole interests of plan participants, and handle plan

assets properly

Five-Year Rule – Requires a beneficiary to distribute

100% of the IRA or plan account by December 31 of

the year containing the fifth anniversary of the account

owner’s death

Inherited IRA – An IRA that is set up and maintained

in the name of the deceased account owner for the

benefit of the beneficiary

IRA – An Individual Retirement Arrangement (IRA) is

a personal savings account or annuity that provides

tax advantages for setting aside money for retirement

Life Expectancy – Used to measure the maximum

number of years over which an account owner or

beneficiary is allowed to take distributions (IRS life

expectancy tables are included in IRS Publication

590-B, Distributions from Individual Retirement

Arrangements)

Qualified Distribution – A distribution from a Roth

IRA or a designated Roth account in a 401(k), 403(b),

or governmental 457(b) plan that will be tax-free

because it is made after the account owner has met a

5-year holding period and has turned age 59½,

become disabled, or died (or for Roth IRAs only,

meets the first-time homebuyer exception)

Recharacterization – Treating a current-year

contribution made to one type of IRA as having been

made to a different type of IRA. Beginning in tax year

2018, recharacterization of a Roth conversion is no

longer allowed

Required Beginning Date – The date by which

required minimum distributions must begin: April 1 of

the year following the year in which the account owner

attains age 72

Required Minimum Distribution (RMD) – An

amount that must be distributed to the account owner

each year beginning with the year the account owner

attains age 72

Rollover – A distribution from an IRA or retirement

plan that is moved directly or indirectly within 60 days

to a receiving IRA or retirement plan

Roth IRA – An IRA that accepts only nondeductible

(after-tax) annual contributions and provides tax-free

earnings if distributions are qualified; may accept

rollovers from other Roth IRAs and pre-tax assets and

designated Roth account assets from employer-

sponsored retirement plans

Traditional IRA – The original IRA (also called an

ordinary or regular IRA) to which annual contributions

are generally tax-deductible; may accept rollovers

from other traditional IRAs and employer-sponsored

plans

Transfer – A tax-free movement of assets directly

between IRAs of the same type

Withholding – Amount that a payer of an IRA or

retirement plan distribution withholds from a taxable

distribution and remits to the IRS as a pre-payment of

income tax on the distribution

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Appendix B – Links to Additional Rollover Resources

IRS Resources

Publication 590-A, Contributions to Individual Retirement Arrangements – A publication that

covers the rules regarding contributions to traditional and Roth IRAs, as well as the rollover and

conversion rules http://www.irs.gov/pub/irs-pdf/p590a.pdf

Publication 590-B, Distributions from Individual Retirement Arrangements – A publication that

covers the rules regarding distributions from traditional and Roth IRAs, as well as the rules for required

minimum distributions and IRA beneficiaries http://www.irs.gov/pub/irs-pdf/p590b.pdf

IRS Rollover Chart – An at-a-glance summary of all eligible rollovers between retirement plans and

IRAs http://www.irs.gov/pub/irs-tege/rollover_chart.pdf

Traditional and Roth IRA Comparison Chart – An at-a-glance comparison chart of the similarities

and differences between traditional and Roth IRAs http://www.irs.gov/Retirement-Plans/Traditional-

and-Roth-IRAs

Required Minimum Distributions for IRA Beneficiaries – A summary of the distribution options for

spouse, non-spouse, and non-individual beneficiaries https://www.irs.gov/retirement-plans/plan-

participant-employee/retirement-topics-required-minimum-distributions-rmds

Department of Labor Resources

Retirement Toolkit – A publication and a timeline provided by the DOL, the Social Security

Administration, and the Centers for Medicare and Medicaid Services to help individuals understand the

issues to consider when deciding when to retire https://www.dol.gov/sites/default/files/ebsa/about-

ebsa/our-activities/resourcecenter/publications/retirement-toolkit.pdf

Savings Fitness: A Guide to Your Money and Your Financial Future – A guide to assist individuals

in learning about retirement plans and setting financial and retirement goals

https://www.dol.gov/sites/default/files/ebsa/about-ebsa/ouractivities/resource-

center/publications/savings-fitness.pdf

Top 10 Ways to Prepare for Retirement – Short, helpful hints to assist individuals in preparing for

retirement, with links to more information https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-

activities/resourcecenter/publications/top-10-ways-to-prepare-for-retirement.pdf

Taking the Mystery Out of Retirement Planning – A guide to assist individuals in calculating how

much to save for retirement and planning for expenses in retirement

https://www.dol.gov/sites/default/files/ebsa/about-ebsa/ouractivities/resource-

center/publications/taking-the-mystery-out-of-retirement-planning.pdf

LPL Resources

For questions about your IRA rollover options and other issues, please contact your Financial Professional

for assistance.

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This material was prepared by LPL Financial.

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